Your intentions were good. You thought
you were up to date with the IRS. Then
something happens and you find you owe
taxes. You owe so much it's criminal-literally.
So now what do you do?
The IRS has a program that allows individuals
to voluntarily disclose situations that may be
considered attempts to evade taxes, enabling
them to avoid criminal prosecution.* This program
has been successfully utilized to avoid prosecution
and reduce taxes, penalties and interest in various
situations such as:
Employment Taxes
The courts have made it clear that any
person, regardless of corporate title, may be
held liable for unpaid employment taxes if 1) the
person knew or should have known that the
employment taxes were unpaid; and 2) they had
some connection with the corporation to affect
a decision on the payment of the taxes.
Income Taxes
During divorce proceedings, one or both
spouses may be aware of unreported income
or false deductions related to previously filed
federal income tax returns. This situation, if
not handled properly, could expose the client to
criminal prosecution and severe civil or criminal
fraud penalties.
Violations and penalties can arise regarding
any form of income, employment, excise, gift or
estate tax, with the most common being:
- Tax evasion
- Failure to collect or pay over tax
- Signing a return known to be fraudulent
or containing false material statements - Aiding in the preparation of a false return
- Attempts to interfere with the administration
of IRS laws - Conspiracy to commit an offense or to
defraud the United States
If found guilty of a felony, you could face,
in addition to other penalties:
- Imprisonment (three to five years)
- Up to $250,000 in fines for individuals
($500,000 for corporations)
- Both imprisonment and fines, together
with the costs of prosecution
As you can see, the penalties and potential
criminal exposure can be quite severe. While
a voluntary disclosure will not automatically
guarantee immunity from prosecution, it may
be the only opportunity you have to avoid a
prosecution recommendation.
To qualify for consideration, any communication
to the IRS must be truthful, timely and
complete. And, you must demonstrate a willingness
to cooperate to determine the correct tax liability.
You also need to make good-faith arrangements
with the IRS to pay in full all taxes, interest and
penalties determined to be applicable.
Frequently, the "timeliness and full disclosure
issues" become major stumbling blocks. Once
financial information becomes public knowledge,
the IRS has the ability to-and often does-
receive and analyze legal filings in matters
regarding divorces, bankruptcies, civil suits
regarding damage claims and disputes among
parties, sales of assets and business enterprises.
An early review and analysis of any financial
and related tax issues in these situations could
save you from an expensive criminal investigation, potential prosecution and additional taxes,
penalties and interest. The amount of tax due
is not the determining factor, but rather the
timeliness and truthfulness of the information
disclosed.
- Filed tax returns that are inconsistent with
known financial records, bank statements,
brokerage statements, property records or
court testimony
- Failure to disclose an ownership of
a foreign account on a tax return
- Tax returns submitted with loan documents
that are inconsistent with filed tax returns
- Financial statements in support of a civil suit
that are inconsistent with filed tax returns
- Filing amended returns without
availing oneself of the voluntary
disclosure program
Some examples of situations that could
prevent a valid voluntary disclosure are:
- Illegal source income
- Someone wishes to remain anonymous
(It is not a voluntary disclosure until the
identity of the taxpayer is disclosed)
- Someone is under grand jury investigation
- Someone is under investigation for
potential Bank Secrecy Act violations
Understanding the policies and procedures
the IRS will and can follow is key. Making sure
that potential tax issues are timely and adequately
addressed before, during and after the filing
of required financial statements in a divorce
proceeding will ensure the ability to avail oneself
of the voluntary disclosure program.
Your tax professional can help you avoid
situations that could even unwittingly give rise to
potential criminal tax prosecution or reduce the
ability to negotiate any abatement of penalties
or interest.
*The revised voluntary disclosure practice continues
to be a matter of internal IRS use and creates no
substantive or procedural rights. As in the past, it is
provided solely for the guidance of IRS personnel.
A voluntary disclosure will not automatically guarantee
immunity from prosecution. This practice does not
apply to illegal source income.
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